The Government’s drive to raise tax revenues has focused on high- earners and it is no surprise that employers and their advisers are looking to soften the blow. After all, high- earners tend to be the most skilled and valued members of the workforce.
Increases in income tax, National Insurance contributions and the loss of personal allowances and pensions tax relief have all fuelled the drive to find alternative, less costly forms of remuneration.
Until recently, trust-based alternatives, such as employer-funded retirement benefits schemes, looked attractive and although the Government was concerned about them, the complexity of the tax rules meant the outcome of any attack on them was uncertain.
The Government’s main objection was that such arrangements either enabled income tax and NI to be deferred (perhaps until rates became more acceptable) or resulted in a lower level of revenue based upon the benefit rather than the full value of the remuneration.
The Government displayed its dislike of these arrange-ments on more than one occasion in 2010 and the Budget, under the heading “Disguised remuneration,” heralded its plans to deal with them. Legislation will be included in 2011’s Finance Bill to tax disguised remuneration payments to employees from employee benefit trusts, EFRBS and other employer third parties.
Legislation will result in a tax charge on such arrangements based on a sum of money made available or the higher of its cost or market value where an asset is used for this purpose.
Whichever amount applies, it will count as employment income to be accounted for under PAYE. It will also apply to new contributions to EFRBS but in that event, where benefits are “just and reasonable” (as yet undefined) they will be payable tax-free.
Where can employers turn now?
To retain the services of valuable employees, it is vital to maintain the value of the remuneration package. Furthermore, there are opportunities for those able to appreciate and accept the risks involved, to secure valuable income tax relief from investments other than registered pension schemes.
They may not suit everyone but these alternatives may be worthy of consideration in the current climate.
Many people still pay more tax than is necessary because of a lack of effective planning. Making maximum use of allowances, reliefs, exemptions and tax bands can help reduce unnecessary exposure.
Arguably, employers can gain kudos and add value to their remuneration package by promoting the benefits of bespoke tax planning and professional advice.
Stephen Greenstreet is managing director of Origen Financial Services